The Government’s Effort on Expanding the Indonesian Downstream Chemical Industry by 2023

by | Oct 27, 2020 | Market Research | 0 comments

“Making Indonesia 4.0”

The Indonesian downstream chemical industry has contributed significantly to the national economy. It is recorded that the industry contributes around 1.19% to the national economy. According to the data from the Central Statistics Agency (BPS), the industrial sector of chemical goods also showed positive performance, reaching a 10.4% growth rate over the same period.

As stated by the Indonesian Ministry of Industry, the government of Indonesia is currently focusing on growing the chemical industry as one of the priority sectors based on the “Making Indonesia 4.0” roadmap. The government aims to further strengthen and deepen the manufacturing structure and also create integrated industries from upstream to downstream in the country.

Indonesia’s Chemical 4.0 strategies include: encouraging the development of domestic petrochemical supply capacity to reduce reliance on imports; building a chemical industry with competitive costs by utilizing oil and gas resources and the optimization of local industrial zones, including the construction of chemical production sites which are closer to natural gas extraction sites; driving productivity; and developing the ability for next generation of chemical production in biofuel and bioplastic production.

The Current Trend of the Chemical Industry in Indonesia 

Indonesia saw a slight drop in foreign direct investment in 2019 but breakthroughs in some high-profile investment during the year’s last quarter fueled optimism for a recovery in 2020. The Investment Coordinating Board announced on Wednesday that the country booked a total of $28 billion in foreign direct investment (FDI) last year, down 3.7% from $29 billion in 2018. Foreign companies brought in $7 billion in direct investment in the fourth quarter, down 5.4% from the same period a year earlier.

President Joko Widodo made the investment his top priority when he was sworn into office for a second term in October. The president has ordered his ministers to clear up bureaucratic bottlenecks that have caused hundreds of billions of dollars in FDI commitment to get stuck in local institutions and regional governments.

Muhammad Khayam, the Director of Upstream Chemical Industries believes the investment will be driven by improved regulations and bureaucratic reforms prepared by the government such as an online submission system and omnibus law which are expected to be acceptable to investors because of the ease of licensing and the offer of incentives provided.

Khayam stated that the ministry has upgraded the incentive packages to become tax holidays and tax allowances. Therefore, existing investors or companies will be expected to expand new factories. He also added that chemical imports in 2023 could potentially decrease around 30%– 40%.

As is known, the current value of chemical goods imports is more than $20 billion. Industry Minister Agus Gumiwang Kartasasmita has pledged to reduce imports of consumer goods and to promote import-substitution industrialization to reduce the country’s current account deficit, which has continued to increase in recent months because of the country’s sluggish exports.

The country’s trade deficit narrowed to $3.2 billion last year as consumers and producers took a punt on a brake on imports, Statistics Indonesia data showed. The country’s total exports fell 6.9% to $168 billion, while imports shrank 9.5% to $171 billion.

Kartasasmita said he is planning to develop more economic and industrial areas and also looking to strengthen inter-ministerial coordination in a bid to remove bureaucratic hurdles in executing the government’s programs.

Addressing High Dependency on Raw Materials

On the road to Making Indonesia 4.0, the government has set a specific focus on the biochemical industry, by taking advantage of the nation’s herbal riches as well as a robust pharmaceutical industry. President Jokowi is also channeling attention on Indonesia’s endeavors to make it the world’s exporter of petrochemical products.

However, the government must first address the problems facing the industry, including the high-reliance of the chemical industry on imported raw materials. One specific case is in the petrochemical industry, which needs around 5.60 million tons of raw materials annually, but only 2.45 million tons can be fulfilled domestically. The pharmaceutical industry suffered the most as 90-95% of the raw materials it needs are imported. The high dependency on imported material has resulted in expensive production costs. 

The government had taken efforts to allay the constraints by allowing foreign investors to take up to 100% ownership in the drug material business in Indonesia. The Indonesia Ministry of Industry also continues to encourage investment in the petrochemical industry sector, aiming to boost the capacity to meet the domestic and export markets as well as to create import substitutes.

The Ministry highlighted that the petrochemical industry also made a significant contribution to the national economy. Investments in the chemical and pharmaceutical industries reached IDR 39.31 trillion in 2018. Adding to that, the chemical industry and goods from chemical groups carved an export value of USD 13.93 billion.

Major Projects in the Coming Years

Indonesia is targeting to bring in investment of US$31.5 billion in the chemical industry until 2023 in line with the government’s plan to reduce the sector’s imports by 40%. The government expects to reap the benefits of several new chemical plants that are currently underway.

PT Lotte Chemical Indonesia

The Indonesian unit of the Korean conglomerate LOTTE Chemical Titan Holding, PT Lotte Chemical Indonesia, has planned to build a petrochemical complex in the country. The plan was based on the encouragement from President Joko Widodo for South Korean companies to invest in Indonesia while pledging to create a more business-friendly environment at the same time.

The successful implementation of the USD 3.5 billion Lotte chemical Indonesia new ethylene project is expected to be the milestone for the LOTTE Group and the company’s plans to become the top tier petrochemical company in Southeast Asia. This project is currently at a planning stage and to be completed in 2023.

Additionally, Lotte Chemical Titan also planned to add a naphtha-fed steam cracker with feedstocks from its Malaysia facility. Upon the completion, the operation site will turn to be an integrated complex with HDPE and LLDPE plants, balancing the trade and reducing the trade deficit in the Indonesian petrochemicals sector.

PT Chandra Asri Petrochemical Tbk

Currently, Southeast Asia’s largest economy has several large projects in the chemical industry such as expansion by PT Chandra Asri Petrochemical Tbk (IDX: TPIA) in Cilegon. The producer spent $380 million to build the factory with a total capacity production of 400,000 tons per annum. Then, PT Titan Lotte Petrochemical Tbk (IDX: FPNI) with a $3.5 billion new petrochemical plant in Banten, according to Muhammad Khayam naphtha cracking plant, industry ministry’ director-general of the chemical industry, as quoted by Bisnis.

Other major projects

Furthermore, the coal gasification project of PT Bukit Asam Tbk (IDX: PTBA) in Riau Island and naphtha cracking plant in Balongan by state-owned oil and gas holding PT Pertamina and its Taiwanese partner CPC Corp. Khayam expects several projects to have a major impact on the country trade balance until 2023.

BRIGHT Indonesia Will Help You Enter the Industry

The Indonesian Government is adamant about developing the Indonesian downstream chemical industry by 2023. On the road to Making Indonesia 4.0, the Indonesian government has high targets and provided major investments for the industry. With many major projects, investments, and new chemical plants underway, Indonesians will be seeing a lot of development in the industry in the coming years.

Finding a local partner might be the right way as the first step to enter the industry. BRIGHT Indonesia provides several services such as Business Partnership Engagement, Business Registration and Establishment, and Business Incubation and Accelerator services that can help you in expanding and developing your business, register and establish your products and company, as well as obtain the work and stay permit in Indonesia ((expatriates utilization plan (RPTKA), expatriates utilization permit (IMTA), limited stay permit (KITAS)) easier.

BRIGHT Indonesia always strives to give excellent services designed only to fulfill your company’s needs. We have experience in working with leading organizations and have a wide network of high-quality contacts in Indonesia. 

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